Premier Miton’s Chief Investment Officer
This update should not be taken as advice. If you are unsure about any of the content please contact your financial adviser. Please remember that the value of financial market investments will fluctuate and investors may not get back the original amount invested. To assist, where appropriate, a glossary explaining some of the terms used has been provided at the end of this update.
On the home front
A month ago, I wrote one of these notes which focused almost exclusively on the UK political and economic scene. It was impossible to avoid commenting on the instability in government, the “go for growth” economic policy triggered by the mini-budget and the dramatic moves in financial markets, particularly the UK government bond (gilt) market. Well, a month is a long time in politics! We have a new Prime Minister, a new cabinet, a reversal of economic policy and an Autumn Statement due on 17 November.
We have also had another, expected, increase in the base rate by the Bank of England. This time it was 0.75%, making the current round of increases the fastest in decades. However, it does not look like they are pushing ahead as much as feared from here. Concerns about what might happen to growth are at the forefront of their minds and they continue to walk the tightrope between beating inflation and avoiding deep recession.
On the other side of the pond
The US central bank, the Federal Reserve (Fed), has also announced an increase of 0.75% in their interest rates. This was the fourth consecutive increase of that size and reiterates the Fed’s focus on beating inflation. As always, the accompanying statement and the press conference that followed are analysed in great detail for signs of what the Fed may be thinking about future policy.
The statement that was released with the announcement of the increase, did give some signs that the Fed thought that the end may be in sight for further hikes. However, at the press conference, the Chair of the Fed, Jerome Powell, did not leave us in any doubt that the fight was still on and was not as optimistic in tone as the Bank of England were about when interest rates might peak. Although, it’s not unknown for him to “talk tough”, as that can make a difference to behaviours as well. Overall, the outlook has changed little as a result, with the peak in US interest rates currently expected to be around 5%, towards the middle of next year.
The US economy is in good shape, with the jobs market remaining strong, along with most other economic indicators, there is hope that the world’s largest economy can avoid recession. Whilst I think that is unlikely, any recession should be relatively shallow, which is good news for the rest of the world.
One final comment on the US, the mid-term elections will take place this month, this occurs halfway through a president’s term in office, and we may see a change in which party controls Congress, which is the only part of the government that can make new laws or changes to existing laws. It is hard to know how much difference that might make, but probably not enough to influence the economy or financial markets at this stage.
Big tech’s results season
No, I was wrong, one final, final comment on the US; overall, last month, US stocks performed well despite the disappointing third quarter results reported by some of the big technology companies towards the end of the month. This included Microsoft, Alphabet (Google’s parent company), Meta (previously known as Facebook) and Amazon, which forecasted weak consumer demand in the upcoming Christmas holiday period. Apple was the relative outperformer even though iPhone sales were lower than expected as this was offset by improving proceeds from its Mac line of computers.
These companies, which are usually put together under the heading of FAANGs, have become a very large part of the US stock market, indeed they have been a major driver of the rise over recent years. However, they became expensive on valuation grounds as result, which has led to many, if not most, commentators to predict sharp falls in their share prices. There is clear evidence of this and it is appropriate to be cautious on the outlook for their share prices.
The Chinese Communist Party held its 20th Congress. These are five year gatherings where President Xi Jinping was confirmed in his third five-year term and the authorities continued their adherence to the zero COVID policy. Similarly, the economy in China is heavily reliant on the property sector, which has been under pressure for some time and is likely to remain under a cloud if the outlook worsens.
This was not taken well, as fears that the world’s second largest economy would not generate the levels of growth that had been expected came to the fore. China is important for world growth and with geo-political risks difficult to quantify, there is another headwind for investors, globally, to consider.
The big question
The question I am asked the most is; what is the outlook for financial markets? Given that the December edition of this note will give a brief review of 2022 and, more importantly, some thoughts on 2023, I will not steal my own thunder here.
However, the answer is not simple and it does vary by asset class. As a teaser for next month, let’s look at bonds briefly.
Let’s not forget inflation and interest rates are still going up; that is not usually a good backdrop for bonds. But, they have fallen a long way and are, arguably, taking into account much of the bad news. Bonds are usually considered to be lower risk investments, for some time, in my view, they have not provided attractive returns for the level of associated risk and they have been a bad asset class to have been invested in this year. That risk / reward profile has changed dramatically. However, any higher returns may not protect investors from the effect of inflation over time.
The last word
Back to the UK.
Investors typically have a domestic bias, meaning they favour investment opportunities in their own country or region. This can simply be because they feel more comfortable with their level of understanding, or feel that international investments carry higher risk or they do not want foreign currency exposure.
I sit more in the camp that investors should look for investment opportunities all around the world; why limit yourself? Therefore, funds I am directly responsible for, will only have exposure to the UK if the outlook is good and there are investments in different asset classes that compare well to all others. Given the upheaval we have been through and the reaction of financial markets; there are now a lot of opportunities in the UK to take advantage of.